> Effects of Terrorist Attacks and Negligible Long-Term National Impact

December 05, 2001

UCLA Anderson Forecast Economists Envision Rapid Recovery of the Greater New York Area Economy from the Effects of Terrorist Attacks and Negligible Long-Term National Impact

LOS ANGELES — Economists with the UCLA Anderson Forecast expect a swift economic rebound from the effects of the World Trade Center (WTC) attacks for the New York/New Jersey area and minimal effect on the extended U. S. outlook. Christopher Thornberg, author of "Disaster Economics: An update on the economic effect of WTC attacks" asserts that there will be a sharp economic "bounce" rather than a prolonged "bust."

Using current available data and theoretical estimates based on the effects of prior disasters, a report issued by the UCLA Anderson Forecast provides detailed analysis of both the local direct damage and the fear and uncertainty created for consumers nationwide. Findings support the economists' assertion that while the attacks caused an immediate decline, they have not substantially worsened the recession already well underway in the U.S. economy.

"Some have claimed that this event actually pushed the U.S. into a recession, and point to massive layoffs in the airline and hospitality industries and the overall decline in consumer confidence as evidence. Yet while such talk creates good headlines, the direct evidence points to something different, " said Thornberg, senior economist with the Forecast.

The response of financial markets to the trauma of a major disaster is fundamentally different from the forces driving the spiraling significant shift of a real recessionary downturn, resulting in rounds of reduced demand and employment layoffs, Thornberg explains. Recessions are defined as "substantial unwanted idleness in the factors of production." They are triggered by dramatic adjustments of system imbalances without the necessary time to accommodate and absorb the displacement, which leads to slow or negative growth over a protracted period.

Disasters tend to cause a short, steep descent followed by a quick upturn in the next quarter and even a possible short-term boost to levels above what would normally be expected, probably due to opportunity associated with the rebuilding process, Thornberg writes. Thus, business that is immediately lost is soon regained, because purchases of goods and services are largely postponed and not canceled.

An examination of the results of the roughly equal dollars of destruction from hurricane Andrew in Florida and the Northridge earthquake in Los Angeles replicates this characteristic pattern. The two types of costs associated with any disaster are the primary damage to physical assets with missed consumption and the more difficult to calculate secondary disturbance of normal business operations. Since both the Florida and California examples indicate disasters do not bring on recessions, because their secondary costs did not continue beyond the following quarter, a full recovery can be expected in the 4th quarter of this year for greater metropolitan New York.

The attack on the World Trade Center is unique in both scope and style and certainly sets a record for lives lost, which accounts for approximately half of the projected primary costs. The toll of this disaster fell more heavily on people, rather than property relative to the previous natural disasters, Thornberg said. The loss of life from the bombing in Oklahoma City, while on a much smaller overall scale, is still proportionate to the losses in the New York region as a percentage of population. Indicators from Oklahoma City point to perhaps a less significant economic fallout than expected for New York.

Thornberg said the current recession was caused by a considerable decline in fixed non-residential investment in the U.S. after many years of heavy investment without profit from the Internet rush of the late 1990s. There are two additional imbalances in the economy at the same time as the investment imbalance, and either vulnerability could allow the terrorist attacks to affect the national economy. They are the trade deficit due to the influx of foreign capital and consumer security concerns.

If the attacks of September 11 provoked a rush to remove foreign assets from U.S. markets or deep drops in consumption, it would certainly worsen existing financial woes. However, foreign investors do not seem to have lost confidence in the U.S. markets, and October sales growth has made up for the majority of the shortfall in September, Thornberg said.

In addition, it has been suggested that the attacks could play a role in the recession through the layoffs in the travel and tourism industries, which were most directly influenced by the event. However, a close examination reveals these results may be in line with what could be expected from only recession-related causes.

For the complete report, "Disaster Economics: An update on the economic effect of the WTC attacks," please call (310) 206-7707.